Azul is to sub-lease its entire fleet of Embraer 195s to Polish flag-carrier LOT and US start-up Breeze Aviation, in order to accelerate a transition to the more fuel-efficient E195-E2 variant.
The Brazilian airline has disclosed a letter of intent for the sub-lease of 18 firm aircraft and 14 options to LOT, subject to the Polish flag carrier’s corporate approvals. LOT had already previously acquired seven E195s from Azul.
Azul, which was founded by JetBlue Airways co-founder David Neeleman, says it will also sub-lease up to 28 E195s to Breeze – the parent company of an as-yet-unnamed Salt Lake City-based start-up that is also controlled by Neeleman.
All 53 of Azul’s E195s are to be phased out by the end of 2022, although the airline’s chief financial officer Alex Malfitani told analysts on a conference call today that this would “most likely” occur by 2021. The aircraft will be sub-leased “at least until the end of the original operating lease term”, which is 4.7 years, says the Brazilian carrier.
Azul chief executive John Rodgerson states that the E195 “has been the foundation of Azul’s business model” but the carrier is now “ready to add larger, more fuel-efficient” E2 aircraft to its fleet.
“Fuel in Brazil is about 35% more expensive than other parts of the world, so it is particularly beneficial to Azul to move to next-generation aircraft as quickly as possible,” adds Rodgerson. Azul has ordered a total of 57 E195-E2s – six via lessors and 51 directly from the manufacturer.
Speaking to analysts on the conference call, Rodgerson noted that the E2s have 18 more seats than the aircraft they are replacing, “so they’re producing more revenue”, and their fuel consumption is 19% better. Maintenance costs are also 16% lower, and aircraft utilisation will improve by 2h to 13h per day.
“The performance of the E2 is so positive to Azul that it almost made sense to just ground the E1 and move to the E2, but we went to the market,” says Malfitani.
Some of the E1s have already left Azul’s fleet, says chief revenue officer Abhi Shah, and “a bunch will start leaving in February”. This will create a “valley” in Azul’s capacity “for a while”, he notes, as E2 deliveries are not set to “ramp up” until the second half of the year.
The airline expects that the acceleration of its fleet transition will generate an incremental operating cash flow of about R2.9 billion ($689 million) between 2020 and 2027. It says the E2’s “better economics” and the sublease revenue generated “will more than offset the incremental cost” of speeding up the replacement of the E195s.
Azul’s five-year fleet plan envisages increasing its fleet from 140 aircraft in 2019 to 200 by 2024 – 75 of which will be E2s, 80 Airbus A320neo-family aircraft, 12 A330s and 33 ATR turboprops. The airline says it has “the flexibility to reduce or increase these numbers, depending on market conditions”.
Rodgerson says the airline has been “working on the transaction” with LOT and Breeze for “three to four months”. The deal is subject to shareholder approval.
